Critical Warning No. 7: Banks crash economy again

Commentary: Time to jail the bankers

SAN LUIS OBISPO, Calif. (MarketWatch) — Drive-time radio. Ominous voice: “Critical Warning No. 6” again, “Something bigger than the credit crisis of 2008 is headed our way. For most people, it will hit them like a brick wall. It will touch Americans harder and deeper than anything else we’ve seen since the Great Depression.”

But wait. The New York Times tells a different story: “Americans seem to be falling in love with stocks again.” Check the facts: S&P 500 just hit a five-year high. Rallied 13% in 2012. Up 120% since we predicted of a new bull market back in March 2009.

Why no respect? Because nobody trusts Wall Street. Banks can’t be trusted. Investors are hopeful, optimistic about the economy. Yes we love the S&P’s rally. But we know the “other shoe will drop” again.

We also remember all the bad news since the 2000 crash when Wall Street’s dot-com insanity pushed the Dow off its then record peak of 11,722, crashing under 7,500 into a 30-month recession that cost Main Street’s 95 million investors $8 trillion in their retirement accounts.

And yes, we remember well Wall Street’s total denial of the countless warnings of a coming collapse for years leading up to the 2008 bank meltdown, the Great Recession and a new cycle with trillions more in losses.

New rally hiding Wall Street banks’ miserable long-term record

The latest rally numbers are deceiving, worry investors because Critical Warning No. 6 reminds us why we can’t trust Wall Street. The fact is, measured on an inflation-adjusted basis, Wall Street lost more than 20% of America’s retirement money in the 2000-2010 decade.

And even a new Dow record topping its 2007 record of 14,164 won’t make up for the 35% inflation since the 2000 crash.

Nobody trusts Wall Street banks anymore. They lack credibility. No principles. No sense of honor. Cannot be trusted. Greed dominates. They lost their moral compass. Lack a conscience. Care nothing about what happens to America.

Wall Street is run by myopic narcissists who care only about short-term profits and bonuses for insiders, even shareholder returns are incidental. They’re blind, cannot see how they their behavior will repeat 2008, sabotaging the economy again.

New Critical Warning No. 7: Banks repeating build-up to new meltdown

Read Frank Partnoy and Jesse Eisinger’s new Atlantic column: “What’s Inside America’s Banks?” They warn: “Some four years after the 2008 financial crisis, public trust in banks is as low as ever.”

This is one of the best analyses of how self-destructive banks are ... created their own crash in 2008 ... why banks were clueless back then and still are ... why nothing’s changed ... why it’s certain to happen again ... with losses and consequences more damaging than in 2000 and 2008 combined. Listen:

“Sophisticated investors describe big banks as ‘black boxes’ that may still be concealing enormous risks — the sort that could again take down the economy.”

Yes, you heard the warnings before: “Too much borrowing, foolish investments, misguided regulation.” All true, “but at its core, the panic resulted from a lack of transparency. The reason no one wanted to lend to or trade with the banks during the fall of 2008, when Lehman Brothers collapsed, was that no one could understand the banks’ risks. It was impossible to tell, from looking at a particular bank’s disclosures, whether it might suddenly implode.”

Today it’s far worse because Wall Street blindly resists, fights all reforms: “For the past four years, the nation’s political leaders and bankers have made enormous — in some cases unprecedented — efforts to save the financial industry, clean up the banks and reform regulation in order to restore trust and confidence in the American financial system. This hasn’t worked. Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash.”

Nothing’s changed. Wall Street is once again America’s worse nightmare

Wall Street can’t be trusted because nothing’s changed. Banks are still myopic, blind, greed driven. They’re playing out the same tragic drama that led up to the Great Depression. Wall Street is its own worst enemy. Our economy’s worst enemy. America’s worst enemy.

Can this descent into financial hell be stopped? The Atlantic is clear: The crooks got away with it. Still are. Years of unethical and criminal behavior continue, even as the guys at the top award themselves huge bonuses.

And nothing will change without “a combination of clearer, simpler disclosure and stronger enforcement that would help clean up the system, just as it did beginning in the 1930s. Not only would shareholders better understand the banks’ businesses ... but managers would have the incentive to run their businesses more ethically.”

In short, “the broad cultural failure on Wall Street has arisen in part because disclosure rules encourage the banks to be purposefully opaque.” If “bank managers faced real consequences,” as Reagan did prosecuting over 3,000 bankers in the 1980s, we might finally see real change. Until then, “all of us will remain in the dark, neither understanding nor trusting the banks. And the rot will spread” until the system collapses as it did in 1929 and causes America’s Second Great Depression, forcing a return to Glass-Steagall.

Critical Warning No. 7: Wall Street will ignite new economic meltdown

Yes, most investors have heard that dark warning many times: “This will hit Americans harder than anything since the Great Depression ... It will hit like a brick wall.” The Dow will lose about half its value, as it did in the recession of 2000-2003 and again in 2007-2009.

The ominous voice behind Critical Warning No. 6, Michael Lombardi, is a gold investor writing in the “Profit Confidential” newsletter where he says his investors profited from his five prior predictions that all came true: Into gold in 2002, out of housing in 2006, the 2007 recession, out of stocks in 2008, then back into stocks in 2009.

Except today it’s far worse: “If the present rally follows the same trend as of 1934-1937, the prices of stocks are expected to fall below their March 2009 lows in the coming months,” when the Dow Jones fell 54% from 14,164 in 2007 to 6,440. Soon after “the next leg of the bear market will be much worse than after the Great Depression.”

Then he warns of a “blanket of gloom, a sense of desperation, a future of uncertainty,” asking us to “imagine the trauma of the following precarious situation: The Utter Simultaneous Collapse of the U.S. Government, The U.S. Economy, The Housing Sector, and the Stock Market.”

Can you trust banks that have lost trillions since 2000?

Many will say Critical Warning No. 6 is over the top, too dark, too ominous, too negative. And yet it taps into our doubts. Maybe it’s true. Maybe No. 6 is simply exposing the enormous distrust and anger most investors have about the way Wall Street toxic greed has screwed up the America economy for years, and continues doing it, until Critical Warning No. 7 brings down the economy.

Yes, we want to believe in the hope and optimism shining through the pages of the New York Times and USA Today. Yes, we want to believe the stock market really is coming back. After all, your retirement money is at risk. Nobody wants another collapse like 2000 and 2008, the third long recession of this new century, with trillions more in losses.

We want hope, but Partnoy and Eisinger’s expose of Wall Street banks raises huge doubts for investors. You’d be a fool to trust Wall Street banks again. For anything. What’s the solution? Partnoy and Eissinger are clear: Stop letting the banks get away with their crooked behavior.

Nothing will change till we act like Reagan and prosecute bankers

Yes, we let Wall Street’s unethical and criminal behavior go unchecked, creating huge losses while the guys at the top give themselves unconscionable bonuses. We also know nothing will change without “a combination of clearer, simpler disclosure and stronger enforcement would help clean up the system, just as it did beginning in the 1930s.”

Bottom line, if “bank managers faced real consequences,” we would finally see real change. More prosecutions. More jail time. Then “managers would have the incentive to run their businesses more ethically.”

Reagan prosecuted over a thousand bankers. Maybe Obama’s new SEC appointment will follow suit. But if we do nothing, “all of us will remain in the dark, neither understanding nor trusting the banks. And the rot will spread” ... while we wait till the other shoe drops ... till our banking system collapses ... till Wall Street repeats 1929 ... and America gets a new Great Depression.

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